Smith & Wesson Brands, Inc.

Thank you for standing by, and welcome to Smith & Wesson's third quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kevin Maxwell, Smith & Wesson's General Counsel. Please go ahead.

Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for our growth opportunities and trends, and industry conditions in general. Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings, which are available on our website, along with a replay of today's call. We have no obligation to update our forward-looking statements. We reference certain non-GAAP financial results. Our non-GAAP financial results exclude costs related to the planned relocation of our headquarters and certain manufacturing and distribution operations to Tennessee, the spinoff of the outdoor products and accessories business in fiscal 2021, COVID-19 related expenses and other costs. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. When we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICs is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICs generally does not directly correlate to our shipments or market share in any given time period we believe mostly due to inventory levels in the channel. Before I hand the call over to our speakers, I would like to remind you that any reference to EBITDA is to adjusted EBITDA. Joining us on today's call are Mark Smith, our president and CEO, and Dena McPherson, our CFO. With that, we'll turn the call over to Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. We are extremely pleased with our third quarter performance. with our top line increasing sequentially and above the comparable pre-pandemic quarter in fiscal 2020, and our bottom line results continuing to show dramatic improvement over pre-pandemic levels. As we've discussed before, our results reflect the work our team has done to capitalize on the opportunity afforded by our flexible manufacturing model during the surge to fundamentally transform our business model as it relates to product mix and pricing. Our improved model is designed to align our product offerings with consumers' expectations of our iconic brand and reputation, and this drives significantly stronger average selling prices and profitability. As a powerful illustration of the impact of our model, revenue of $129 million in our fiscal third quarter increased 1% from the comparable period in fiscal 2020, while EBITDAs increased by nearly 60%, aided by a 440 basis point improvement in gross margin. reflecting higher ASPs and lower operating costs. These results underscore the value of our purposeful realignment of pricing and mix to capitalize on the key characteristics that underpin the Smith & Wesson brand, including the highest standards of quality and innovation. Additionally, our higher levels of profitability enabled us to make sound long-term decisions as we navigated the headwinds associated with the macroeconomic inflationary pressures and moderation in sales volume that we and the industry experienced coming off peak demand levels during the pandemic. As our results from this quarter demonstrate, our model allows us to maintain strong profitability in any environment. Moving now to the marketplace, we believe the adjustment period from the surge is largely in the rearview mirror, and consumer demand for firearms has returned to a more normal seasonal cadence. And we'll note that the new normal seems to have settled at a higher level than pre-surge, as expected and experienced during prior surges. Highlighting this, NICS strengthened throughout our third quarter, including a 6.5% increase in January. On a year-over-year basis, NICS was fractionally up for the quarter, but this was the first time in our fiscal 2023 that we saw an increase on a quarterly basis. Both Q1 and Q2 NICS were down low to mid single digits year over year. The strongest areas of the market have been low-end entry-level products and higher-end premium or fully featured products. This is consistent with what you've seen in other consumer-facing industries that are sensitive to the volatile macroeconomic environment. Overall demand has remained relatively strong, however, it has become bifurcated, with core buyers becoming more price-conscious and focused on value, and at the other end of the spectrum, are those consumers that index high relative to innovation, quality, and brand perception, and whose discretionary spending is much less impacted by macroeconomic factors. We are constantly monitoring these trends, and as I mentioned earlier, our existing and upcoming innovative product offerings are perfectly aligned to balance volume and maintain optimal profitability levels. It's also worth noting that with increased inflationary pressures on household budgets, there is an increasing amount of anecdotal evidence showing heightened activity in the used firearm market, which also aligns with what we typically see when consumers are feeling pressured or becoming more guarded with spending. Firearms generally hold their value well over time, which supports a healthy secondary market for firearm retailers. As you know, a used gun sale transaction at retail is required to undergo background checks, just as new gun sales do. And so consumer purchases of used firearms would be included in NICS data, and this may help explain why you're starting to see more divergence between reported NICS and firearms manufacturers' results. With this, promotional activity within the industry has returned to normal seasonal levels in recent months, much as expected when we spoke to you last quarter. In mid-January, we also began offering rebates on select products. However, as I mentioned earlier, we do take a very targeted and long-range approach to promotional activity, aimed at maintaining market share and working with our retail and distributor partners to help them optimize sales, profitability, and inventory levels across their full assortment of Smith & Wesson products. Importantly, our strong balance sheet and low fixed cost base allows us to remain disciplined in maintaining our brand positioning and profitability gains as we consider promotions. But our main focus for the long term continues to be on innovation and new product introductions. A steady cadence of innovative new products not only helps with near-term results, but more importantly, strengthens our competitive position as an industry leader. Thanks to the extremely hard work of our world-class engineering and new product development teams, during the third quarter, new products accounted for 21% of our sales. Recent product launches are performing extremely well with competitor M&P Metal and M&P 5.7 all immediately taking top seller positions with our channel partners. We also just launched the M&P Folding Pistol Carving last week, which is already in high demand. And as a matter of fact, many of the recent launches are outperforming even our own expectations, and we are working to increase production on those lines. You can expect that this cadence of innovation will continue into calendar 2024, as our new product pipeline is extremely healthy. Moving to a discussion of inventory levels, we believe the channel inventory correction we've mentioned in past calls is now in the rearview mirror. While the first half of Q3 continued to see a decline in distributor and big box retail inventories, the levels have remained flat since the holidays. While simultaneously, our incoming order rates have improved dramatically, returning to more seasonal levels. This indicates that inventories, both at our channel partners and at brick-and-mortar retailers, have stabilized from the overstock position that resulted from the end of the surge, and sell-through of our products at the counter remains strong. Our internal inventories also began to come down during this quarter, and we expect that the levels we hit in October at the end of our second quarter were the high watermark, with the inventory decline accelerating even further by fiscal year end. However, please keep in mind that we expect inventory will remain elevated compared to historical levels to support our upcoming move to Tennessee. On that note, just a quick update on the progress we are making in Tennessee. The construction phase of the project is in its final stages, and as a matter of fact, equipment setup has already begun. Our schedule remains on track for the operational startup to begin over the summer and continue through the fall, with our new headquarter office space being ready in the October timeframe. The major spending phase of the project is nearing its end, and as Dina will cover in a moment, returns us to our normal strong cash generation position by the second half of fiscal 2024. I also can't talk about this project without sincerely thanking our absolutely amazing employees, many of whom are impacted by this move and yet continue to deliver each and every day for our beloved company. The success of this project and of the company throughout it has been possible only because of their dedication and loyalty to Smith & Wesson. In summary, the firearm market remains healthy, with strong participation growth in recent years on top of a large and loyal base of core consumers, all of which leads to a compelling view of the future for a leading brand like Smith & Wesson. Our success is driven by our disciplined focus on generating long-term, profitable growth and market share gains by leveraging our flexible scalable business model that has proven highly adept at delivering strong rates of profitability despite wide variations in demand. The next several quarters will likely continue to be impacted by inflationary headwinds, but with inventory correction in the rearview mirror, our solid product portfolio, new product launches, and strong industry partnerships, we expect revenues to increase on a sequential basis from Q3 to Q4. Most importantly, I'm ever grateful for the hard work of our dedicated team and their tireless efforts to execute against our long-term vision and consistently deliver on our commitments to our customers, employees, and stockholders. With that, I'll hand the call over to Dina to cover the financials.